Michigan’s attempt to introduce
competition in electricity supply, which showed early promise, is now showing
signs of defeat. Between regulators who distrust markets and incumbent utilities
bent on defeating rivals, the initial benefits from competition are being
reversed. Unless the Michigan Legislature acts to bolster competition, the
state’s poor-performing economy will be burdened with yet another competitive
disadvantage.

Michigan households, schools and
businesses have long paid significantly more for electricity than those in
neighboring states, primarily because of regulatory policies in the state. In
response, the Michigan Legislature in May 2000 approved the introduction of
competition in retail power supplies. Public Act 141 was intended to lower rates
and improve service quality by ending the monopoly structure of electricity
generation, as well as by increasing generating capacity in the state.

By 2004, the introduction of competition was proceeding steadily,
and the benefits were apparent. Michigan businesses and schools were saving
millions of dollars in electricity costs by contracting with new suppliers at
substantially lower rates than those charged by the incumbent utilities. New
generating capacity was also coming online, mostly in the form of natural
gas-powered facilities that run cleaner than the coal-burning plants of the
incumbents.

In the past two years, however, several forces have combined to
undermine competition. Surcharges, authorized by Public Act 141 but not
implemented until November of 2004, require customers of rival suppliers to pay
for the "stranded" costs of the incumbent utilities’ past investments in
generating capacity. In other words, the rates of new suppliers subsidize their
larger and better-established rivals.

In the 12 months following imposition of the surcharge, industrial
electricity rates, the category with the most vigorous competition, jumped 13.2
percent, from 4.93 cents per kilowatt hour
to 5.58 cents, according to the U.S. Energy Information Agency. During the same
period, rates in all of the states surrounding Michigan started out lower than
the Michigan rates and rose by much less. In Illinois, these rates actually
dropped from 4.66 cents to 4.55, so that industrial employers deciding between
Michigan and Illinois will now see that their electricity costs will be over 25
percent higher in Michigan.

A loss of competition appears to be a major
reason for Michigan’s escalating rates. According to a report by Michigan Public
Service Commission staff, the number of businesses getting electricity from an
alternate supplier fell in 2005, the first decline since Public Act 141 was
enacted. According to the PSC report, average monthly sales by rivals of Detroit
Edison fell 26 percent in 2005, a reversal from the gains of 45 percent in 2004
and 138 percent in 2003. In the Consumers Energy territory, the number of
customers buying from alternate suppliers dropped by 20 percent although total
sales to the remaining customers actually increased by 1 percent. Overall, sales
by competitive suppliers dropped by about 20 percent in Michigan, which the PSC
report attributed primarily to customers returning to DTE Energy after the new
surcharges eliminated the savings from competitors in DTE’s territory.

To make matters worse, the Public Service
Commission is attempting to add another tax on top of the existing surcharges,
although this has drawn a legal challenge from Michigan Attorney General Mike
Cox. The Michigan Court of Appeals ruled in November that the PSC had indeed
exceeded its authority by unilaterally imposing a surcharge of 5 cents per meter per month on customers of Consumers Energy to subsidize renewable energy
programs. An appeal of that decision by the PSC is now pending before the
Michigan Supreme Court.

In its most recent report on electricity
competition in Michigan, the PSC recommended only one legislative change —
authorizing the PSC to reimpose the 5 cent tax. Despite the mounting evidence
that electricity competition is faltering in Michigan, the only improvement the
PSC recommended is yet another surcharge to make Michigan rates even less
competitive with those in surrounding states.

In January, the PSC staff advocated another
approach for encouraging suppliers to build more capacity in Michigan. The
report notes that the early momentum for electricity choice has stalled and not
enough supply is coming in for future needs. Therefore, according to the staff
report, regulators should be empowered to grant subsidies to favored firms for
construction of generating capacity. The subsidies would be financed by imposing
even more surcharges on ratepayers. Remarkably, the PSC report calls this a
competitive process, because private firms have to compete for favors from the
regulators.

While the PSC proposal may result in some new
government-subsidized competition, a far simpler and more effective approach for
meeting future electricity needs is available. Electricity choice was making
inroads, providing customers with substantial cost savings in the 3 ½ years it
was allowed to operate. Only when regulators imposed large surcharges on
competitors to subsidize the incumbent firms did competition stall.

Competition has proven successful in Michigan,
and its benefits can still be recovered if the Legislature would remove or
greatly reduce these subsidies to the incumbent utilities. As we saw from 2002
to 2004, the positive impact of electricity competition is measurable.
Michigan’s economic recovery needs all the advantages available, and the state
can ill-afford to abandon competition in electricity supply.

#####

Theodore R. Bolema, an attorney and faculty member at
the Central Michigan University College of Business Administration, is an
adjunct scholar of the Mackinac Center for
Public Policy, a research and educational institute headquartered in Midland,
Mich. Permission to reprint in whole or in part is hereby granted, provided that
the author and the Center are properly cited.